Missing the Point: Breaking Up Firms “TBTF”

Monday, July 6, 2009

The Obama Administration has decided that “Big Business,” large financial services companies in particular, cannot be allowed to become “TBTF.” I didn’t make that up. In a world in love with text messaging, it stands for “Too Big To Fail.” Once again, our new President and his Administration have demonstrated their lack of respect for the power and intelligence of our capitalist system, and of our government’s relationship to it.

On the face of it, it seems to make sense. Never let a company become so large such that we, the people, have no choice but to bail it out when it gets in trouble. Unfortunately, it’s a reasonable assertion based on an unreasonable assumption by President Obama that is fiscally irresponsible and dangerously off base for a number of reasons.

Simply put, the assumption he’s making is that the economy is not capable of taking care of its own – the flip side of which is “Government knows best.” Not just any government, mind you. He’s not, for example, allowing that the Bush Administration would know what it was doing under similar circumstances. No. President Obama is talking about himself and his Administration which is one of the huge problems with his strategy. Its effectiveness depends upon who’s in charge.

“Well obviously the economy is not capable of managing itself,” so the President would argue, pointing to excessive risk-taking which helped initiate the current recession. Fine, but that doesn’t mean the solution is to take control of that economy. A much more effective and far less expensive approach is provide the minimum degree of regulation necessary prevent a reoccurrence of the bad behavior. AIG, for example, is an insurance company. Why don’t the same rules apply to insuring investments as to more mundane coverage such as home, auto and life insurance? Why, for another example, aren’t hedge funds regulated like banks? In fact, it’s arguable that the economy would ultimately learn its lesson and self-impose the same and even more severe controls on its own.

When companies fail to produce sufficient profits to justify their existence, the economy – not the government – will force them to morph into something that operates more profitably in the markets they serve. Behavior that produced losses will be shunned in favor of new business models that work. Unproductive components will be liquidated. Inadequate management will be replaced. It is, in fact, an ongoing process for the best managed firms which initiate such adaptive changes on their own and in advance of their problems getting out of control. Poorly managed companies, on the other hand, don’t understand or care, and end up having their lunch handed to them through a natural, albeit sometimes painful process.

These are things the economy does every day, at remarkable speed all things considered, all by itself – until government becomes impatient. Unfortunately, more often than not, severe government intervention either postpones the inevitable and/or alters the behavior of certain firms and markets in ways which are less desirable than what a more natural process would have suggested – wasting billions, even trillions in the process.

Is there nothing the federal government should do to help protect our economy in the event that an AIG, General Motors or Citibank fails? Of course there is: Provide support for related companies and, most importantly, for consumers whose livelihoods will be adversely affected. Helping them maintain their levels of consumption will not only serve humanitarian objectives, it will help prevent the downturn from becoming too severe. Beyond that, government domestic economic policy should manage the money supply within the limits of reasonably defined powers, and guard free enterprise against monopoly and other factors interfering with competitive market behavior.

What the government should not be doing is telling business how it should behave. There’s a difference, a not at all subtle and highly material difference between “assistance” and “control.” It’s a critical distinction President Obama doesn’t seem to appreciate. It’s one thing to help someone cross the street. It’s another thing altogether to tell them which street to cross and which direction to go once they get to the other side.

To be sure, there are those in the current Administration and Congress who would argue that the costs of helping affected consumers and small businesses greatly exceed the costs of bailing out and/or dictating the behavior of certain companies, but it’s an argument that has no merit. It’s factually incorrect as can be proven by considering how bailout monies might have been more quickly and effectively deployed through programs to protect consumers. As an effective and fiscally responsible means of stimulating the economy, the Obama strategy of intervention is counter-intuitive and just plain bad business.

Unfortunately, President Obama doesn’t seem to be able to help himself. He needs to get it out of his head that government is bigger and smarter than the economy. His is an arrogance born of naïveté which he has got to get over, for our stake of course, but, to play to his ego, if he has any hope of being remembered as a good, let alone great President.

At this rate, and if the Republicans can get their act together, he’ll be lucky to be re-elected.

-wf


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